Blowing the whistle so hard it hurts

Nearly all Ireland’s banks breached liquidity requirements, leading to the lack of liquidity that the government provided a guarantee against, and which ultimately emerged as the insolvency that bankrupted the country and immiserated the next generation. Failures at the Regulator and in the Central Bank contributed as much as anything to this bankruptcy. The public is entitled to know that these well-paid and cosseted functionaries have learnt lessons and are now demonstrating the most stringent and scrupulous standards. It’s interesting then to know how they treated the most important whistleblower in Irish banking history.

In December 2010 a risk-manager in the Irish unit of UniCredit, Italy’s largest bank, described in Village how in 2007 the Financial Regulator failed to intervene after he first alleged he falsified liquidity-ratio figures. The risk-manager maintained he was specifically warned by senior personnel at the Irish subsidiary not to report the matter to the Financial Regulator, even though sound banking depends on maintenance of these ‘liquidity ratios’ which are crucial to the ability of the company to deal with losses of confidence. The liquidity ratio should be no less than 90 per cent. At UniCredit it was calculated at an extraordinary 50 per cent. A ratio of 89 per cent would in normal circumstances be deemed problematic. In banking terms this is like paying with a two-euro note.

Jonathan Sugarman blew the whistle on the massive repeated breaches. This magazine received aggressive threats from McCann FitzGerald solicitors on behalf of UniCredit not to publish the information.

The new ‘poster-boy’ regulator, Matthew Elderfield, stated in response to questions from the Sunday Business Post, and the Süddeutsche Zeitung, a respected German newspaper, about statements made in the Seanad by David Norris which backed up Sugarman’s account, that “our records do not match the description of events given by Senator Norris nor did we receive what might be described as a ‘whistleblower’ letter. We can, however, confirm that an overnight liquidity breach was reported by an institution around the time in question. The matter was followed up with the institution and rectified to the satisfaction of the Financial Regulator at the time”.

For someone in whom so much public good-will has been invested, this is remarkably disingenuous, though certainly true. The Regulator’s records presumably do not match Senator Norris’s because its agents didn’t look hard enough or take a proper record; and the Regulator did not receive a whistleblower letter as the letter came from UniCredit itself, which limited its declaration to one overnight breach. Notably, nothing the Regulator said undermined the credibility of the risk-manager.

Largely as a result of the story in Village which named the bank, the Central Bank said it would conduct a review of the case and invited parties with information to share it: “if any party has specific information they wish to draw to our attention in this matter it will be treated on a confidential basis”. Things dragged out but in February 2012 the risk-manager attended a meeting with the office of the regulator. Scandalously the bank’s offer of ‘confidentiality’ was revealed under pressure to be spurious when it insisted that it wouldn’t be enough to shield Sugarman against self-incrimination in the event his own actions constituted criminal activity. The Central Bank insisted it must forward information to the DPP if there were evidence of a crime. This highlights the need for whistleblower legislation to protect insiders who tell their truth – and particularly that legislation should be retrospective, so it would embrace cases like Mr Sugarman’s.

In June, the Central bank informed Mr Sugarman, without giving reasons, that the matter was closed and only after Mark Keenan raised the affair anew in the Irish Independent in September, did the Central Bank finally furnished minutes of the meeting it had had with Mr Sugarman. This was six months after the original meeting. For some reason Mr Keenan is no longer writing on these issues in the Irish Independent.

Matthew Elderfield and his office are doing no favours to EU banking regulators, or to the world’s banking and economic system, in being disingenuous about liquidity breaches at the elusive UniCredit. If there is a desire not to frighten the horses just while our bailout is under review, it is misplaced. The lesson of recent history for this country is scrupulousness and openness.

There is a general official view that Ireland’s ethical delinquencies are in the past. Deviant planning stopped when the tribunals started; and bad banking regulation stopped with the demise of Pat Neary. In fact this is not so with planning as we have seen with the kicking to touch of John Gormley’s reviews of planning in six counties. Scrutiny of what happened in banking has been limited to two innocuous reports by Patrick Honohan, Peter Nyberg and Klaus Regling. These notably failed to attribute blame or to deal with how liquidity ratios were breached all over financial Dublin with no comment from the usual over-paid auditors, and no sanction.

Inconveniently for a country that has started to see corruption and regulation in black (then) and white (now) terms, the general view may not reflect the reality. Without proper scrutiny we cannot be sure either way.

Like bad planning, bank under-regulation was a manifestation of this country’s ineradicable tendency to pander to vested interests and to the short term. It is time we got to the bottom of what happened in Irish banking. Scrupulous investigation of Mr Sugarman’s allegations would be a symbolic good start.